The Federal Open Market Committee (FOMC) this afternoon released minutes from its mid-September meeting three weeks ago, providing more insight into the thinking of the policymaking committee on its decision to hold rates last month. The notes revealed nothing earth shattering; they confirmed that Fed officials felt comfortable with the state of the domestic economy but wanted to ensure that overseas developments—particularly the risks of a slowdown in China—would not impact the U.S. before they actually tighten.
However, the FOMC did not know three weeks ago that we would see such weak September employment data as the Labor Department reported last Friday. The U.S. gained only 142,000 nonfarm jobs, and the BLS slashed the August gain to 136,000 from the already soft 173,000 it had originally reported.
Read more about Minutes and Updates 10-08-15
The market decline continued on Monday, but broke even on Tuesday and on Wednesday reversed course with roughly a 1.9 percent gain to finish September in the red—and the third quarter with the worst quarterly losses in four years.
Indications that the U.S. economy remains on the path to recovery remained insufficient to break the negative mood. Last Friday we learned, as the third estimate of the 2Q GDP was released, that the U.S. economy grew at an annual 3.9 percent pace in the second quarter. That topped the earlier estimate of growth at a 3.7 percent pace. Read more about New Quarter, New Beginning 10-01-15
After the market rallied on Monday, investors were rattled, once again, by growth concerns, on Tuesday. Stocks continued in the same direction Wednesday and today as investors shunned risky assets, rotating into cash and bonds. The yields for the benchmark 10-year T-note fell under 2.1 percent today. The U.S. dollar, on the other hand, has strengthened this week, and volatility increased.
What also adds to the markets’ wild gyration is that investors continue to receive conflicting Fed signals. After deferring a rate increase last week, several Fed officials have spoken and renewed the suggestion that a rate hike may be in the cards this year. Investors will, no doubt, pay rapt attention to Fed chair Janet Yellen’s upcoming speech entitled Inflation Dynamics and Monetary Policy at the University of Massachusetts Amherst, which she will give today at 5 p.m. local time. Read more about Conflicting Signals, Volatile Markets 09-24-15
The Fed does the economy-watching, telegraphing most of its moves ahead of time. And even this time, when the market had widely expected the central bankers to begin its tightening cycle soon, as inflation softened and some economic data weakened. Thus, heading into this week’s Federal Open Market Committee (FOMC), the probability of the September hike had decreased.
The consumer price index fell by 0.1 percent in August, the first decline since January, according to the U.S. Department of Labor. That reflects the consequences of a 15 percent plunge in the cost of energy in the last year.
Indeed, today the FOMC, as was largely expected, once again delayed raising overnight lending rates. A change to its policy statement from last time, the FOMC stated that “recent global economic and financial developments may restrain economic activity somewhat.” Events “are likely to put further downward pressure on inflation in the near term.” Read more about Holding Steady 09-17-15
The market clearly is nervous. After the wave of selling, bargain-hunters drove the market higher, but momentum remains elusive. Good economic data helps. An August 27 U.S. Commerce Department report estimated real U.S. Gross Domestic Product had grown much faster in the second quarter than initially believed, at a 3.7 percent annual pace, a very large increase from the original July estimate of 2.3 percent GDP growth, and a big improvement from the estimated 0.6 percent first quarter increase in real GDP. In other words, the U.S. economy witnessed solid demand.
The strong GDP increase seemed to help drive the stock market into a calmer mode at the end of August. Read more about Get Used to the Higher Volatility 09-10-15